► Commentary on BFH, Judgement of 20.11.2024 – VI R 21/22
Authors: Dr. Henning Frase LL.M., Attorney/Tax Advisor/Specialist in Tax Law at 3T.LAW in Cologne/Berlin, and co-editor of a work on employee participation models; [●]
► I. Background
The transfer of genuine equity interests in a company to an employed executive or other employee is generally relevant for wage and income tax purposes. In principle, such a transfer is considered a taxable benefit if shares are provided below market value due to the employment relationship, requiring the deduction and remittance of payroll tax. This often leads to taxation without any liquidity inflow, particularly when the transferred shares are subject to holding restrictions. For small and medium-sized enterprises (including scale-ups), tax relief introduced in July 2021 (expanded as of January 1, 2023) allows for deferred taxation of so-called dry income under Section 19a EStG.
In a recent decision, the Federal Fiscal Court (BFH) clarified that, under certain structuring, company shares can be transferred to employees tax-free as part of a succession plan. In such cases, the transaction falls within the scope of inheritance and gift tax rather than income tax.
► II. Facts and Ruling
The case at hand (originating from 2013/2014) concerned a succession arrangement made upon the founding shareholder’s 65th birthday. In this context, approximately 25% of the shares in a GmbH were transferred to various executives, including the plaintiff, while the remaining 74.61% of shares were transferred to the founder’s son, subject to a usufruct reservation.
The shareholder resolutions and transfer agreements explicitly stated that the share transfer was undertaken for succession planning purposes. Notably, the transfer was not tied to the existence of an employment contract, and a clawback clause for inheritance tax purposes was included, stipulating that shares would revert if tax authorities did not recognize the transfer as a privileged business succession transaction.
During a payroll tax audit, the tax authorities deemed the share transfer a taxable benefit due to the discounted share price. A subsequent notice was issued to the plaintiff’s local tax office, leading to an adjustment of the plaintiff’s income tax assessment by adding the benefit as employment income. However, both the Finance Court of Saxony-Anhalt and the Federal Fiscal Court ruled in favor of the plaintiff.
► III. Analysis and Commentary
This decision marks the first time the BFH has addressed the distinction between taxable income and non-taxable share transfers in the context of succession planning. The key advantage of this structuring lies in the business property relief provisions: if the 25% threshold is met, no gift tax applies, provided that the new shareholder-managers continue the business and maintain employment levels as required for the payroll test.
► IV. Conclusion and Practical Implications
The ruling primarily affects small and medium-sized enterprises undergoing succession planning. It reinforces the logical principle that an internal successor should benefit from inheritance tax relief if the transfer secures business continuity. The BFH’s clarification provides much-needed legal certainty.
For larger companies and most practical cases, the 25% threshold is unlikely to be met, as employee participation programs typically allocate only a small percentage of company equity to employees. Additionally, such programs usually condition share retention on continued employment, which contradicts the concept of a business succession transfer. Consequently, these models will not benefit from the favorable tax treatment outlined in this decision.
